A SPAC merger is when a corporation is formed without any business operations for the purpose of raising funds through an Initial Public Offering.
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What Is A SPAC Merger
A SPAC merger refers to a Special Purpose Acquisition Corporation merger with another company generally for the purpose of raising capital through an initial public offering (IPO).
The Special Purpose Acquisition Corporation is a shell company that does not have any commercial operations and it raised capital to then acquire an existing company.
Since the SPAC is listed on the stock exchange, it is a reporting issuer subject to relevant provincial securities commission rules and regulations.
In Canada, the SPAC can be listed on the Toronto Stock Exchange (TSX) via an Initial Public Offering and it is required to raise a minimum of $30 million in capital.
Then, 90% of the capital raised will be placed in escrow until the funds are used to acquire an existing company within 36 months of the IPO.
The acquisition of an operating company is defined as a Qualifying Acquisition.
Anyone can invest in a SPAC such as private equity funds and the general public.
Keep reading as I will break down the meaning of a SPAC merger so you know how it works.
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SPAC Merger Advantages
The main benefit of a SPAC merger is that investors or experts in certain areas can raise capital to fund a company’s growth.
Since SPACs are required to invest in a qualifying business, they will use the capital raised to merge with an operating entity.
The SPAC merger not only provides investors access to capital but can also enable the quick listing of a private company on the stock exchange.
In some cases, a company may use a SPAC merger to accelerate its listing in the stock exchange than a much longer path through a traditional IPO.
Another important advantage is that SPAC mergers tend to be profitable for the operating entity as it may demand a premium on the sale of its business.
Since SPACs have a limited time to enter into a Qualifying Acquisition, the target company will use that as leverage to seek higher bids.
Also, since SPACs are typically sponsored by experienced investors or private equity firms, the target company will experience enhanced market visibility.
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SPAC Merger Disadvantages
Although SPACs can offer a good way to raise capital and take a private company public, it also has disadvantages.
The most notable disadvantage for retail investors is that the SPACs may not provide the returns expected by investors.
In other words, the financiers and promoters may exaggerate the SPAC potential leading investors to find themselves losing money.
Another important disadvantage is that SPACs are public entities and are subject to the same regulations and securities laws as any other public company.
As a result, SPAC founders must be familiar with the process or have the right team in place to ensure that they comply with the proper laws and regulations.
SPACs are required to file a prospectus, and information circular with prospectus-level disclosures, and complete a Qualifying Transaction within 36 months.
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How Does SPAC Work In Canada
Let’s go over how SPAC mergers work in Canada, step by step.
The first step is for investors or individuals with subject matter expertise to incorporate a shell company (called the Special Purpose Acquisition Corporation).
Then, the SPAC founders will raise the minimum required seed capital.
At the same time, they will prepare an IPO prospectus and file it with the applicable securities commission for listing on the TSX.
The SPAC prospectus will indicate the SPACs intention to raise at least $30 million by selling its shares at a price of at least $2 per share.
It must sell at least 1 million shares held by 300 board-lot shareholders free of any resale restrictions where the aggregate market value of the securities held by the public is $30 million.
Upon sale of the securities, the shares are listed for trading on TSX.
However, the SPAC must place 90% of the funds received for the IPO in escrow along with 50% of the underwriter’s commission until the Qualifying Acquisition.
The remainder of the shares is held by the SPAC founders.
Finally, within 36 months of the IPO, the SPAC founders must complete a Qualifying Acquisition which means they must buy assets or a business having an aggregate value of at least 80% of the funds in escrow.
The SPAC must prepare a draft information circular with the necessary disclosures to the TSX for pre-clearance.
It must also file a non-offering prospectus for the resulting issuer with the applicable securities commission.
The SPAC can complete the Qualifying Acquisition once the majority of the public holders of the SPAC approve the transaction at a shareholders’ meeting.
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Takeaways
So there you have it folks!
What is a SPAC merger?
In a nutshell, a SPAC merger is when a Special Purpose Acquisition Corporation mergers with an operating entity taking the entity public.
Experienced management teams and sponsors can use SPAC mergers to raise capital through an IPO and merge with an operating entity thereby taking an operating company public.
For the SPAC merger to be completed, the SPAC must obtain the approval of its shareholders and clear all regulatory requirements for the completion of the Qualifying Acquisition.
Individuals, entrepreneurs, and experienced management teams should have the right team of lawyers and accountants accompany them to ensure they comply with the requirements of the applicable securities commissions.
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